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Productivity Trumps Fuel Costs at UAL

The carrier posts a quarterly profit of $190 million.
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Updated from 9:34 a.m. EDT

UAL

(UAUA)

, the parent of United Airlines, posted third-quarter net income of $190 million, a result of higher ticket prices and a continued effort to boost productivity following its February emergence from bankruptcy protection.

The second-largest airline said net income equated to $1.30 a share on revenue of $5.2 billion, up 11%. Analysts surveyed by Thomson Financial had forecast earnings of $1.43 a share on revenue of $5.2 billion. On a conference call, CFO Jack Brace said the company would have earned $1.73 per share had it not allocated 43 cents to account for income tax expenses.

United said it showed a year-over-year $95 million improvement in net income after special items. It said that continued revenue and productivity enhancements more than offset a $293 million increase in the cost of fuel. Shares of United fell 83 cents, or 2.3%, to $35.94.

United has been widely criticized for not securing more cost improvements during its three-year stay in bankruptcy. But CEO Glenn Tilton said that following its emergence, the airline has been able to involve employees in cost-cutting through numerous initiatives that each produce their own savings.

"One of the things we get to do, post-exit

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is to involve all of our employees in activity that is much more relevant to them, in identifying and realizing cost-saving initiatives," he said. "If we can improve the customer experience, improve employee engagement, and simultaneously improve our costs, I think we're going to ring the potential out of this company that has always been here."

United said it has captured $300 million in cost and revenue benefits targeted for 2006, as well as $135 million that was sought for next year. As a result, mainline cost per available seat mile, excluding fuel and special items, was 7.08 cents, down by 0.4%. Meanwhile, mainline passenger revenue per available seat mile rose 10.2%.

Consolidated capacity rose 3.1% and is expected to climb just 1% in 2007, driven entirely by higher aircraft utilization.

United said the impact from security changes following the disclosure of a failed terrorist plot in the U.K. to blow up airplanes was "nonmaterial." While several low-cost carriers have identified significant impacts, Brace said "we were solidly booked going into it

and suffered less customer disruption than others did."

Tilton reiterated his long-standing contention that consolidation would benefit the industry, but acknowledged that industry response has been muted. "I think the reaction has been personal

to individual companies," he said. "Other industries have benefited, but at the end of the day it's at the discretion of individual participants."

As of Sept. 30, UAL's cash position was $4.9 billion, including $860 million in restricted cash. "We clearly have more cash than is optimal," said Brace. "Our first priority will be to reduce debt levels."